In this article, we will discuss about presumptive taxation scheme under sections 44AD, 44ADA & 44AE of the Income Tax Act,1961
What is Presumptive Taxation Scheme?
As per the Income Tax Act, 1961 a person engaged in business or profession is required to maintain regular books of account & also he has to get his accounts audited. To give relief to small taxpayers from this tedious work, the Income-tax Act has provided the presumptive taxation scheme under sections 44AD, 44ADA & 44AE. A person adopting the presumptive taxation scheme can declare income at a prescribed rate & is not required to maintenance his books of account & to get its accounts audited.
- Section 44AD: For Small Businesses.
- Section 44ADA: For professionals.
- Section 44AE: For GTA Businesses
Presumptive Taxation Scheme under sections 44AD
Applicability
i. It is designed to give relief to small taxpayers engaged in any business (except the business of plying, hiring or leasing of goods carriages referred to in section 44AE)
ii. Presumptive taxation scheme under section 44AD can be adopted by following persons:
a) Resident Individual
b) Resident Hindu Undivided Family (HUF)
c) Resident Partnership Firm (not Limited Liability Partnership Firm)
iii. In other words, the scheme cannot be adopted by a non-resident & by any person other than an individual, a HUF or a partnership firm (not Limited Liability Partnership Firm.
iv. This scheme cannot be adopted by a person who has made any claim for deductions under section 10A/10AA/10B/10BA or under sections 80HH to 80RRB in the relevant financial year
Not Applicable to
i. Business of plying, hiring or leasing of goods carriages referred to in section 44AE2.A person who is carrying on any agency business.
ii. A person who is earning income in the nature of commission or brokerage
iii. A person carrying on profession referred to in section 44AA (1) is not eligible for presumptive taxation scheme
iv. An insurance agent cannot adopt the presumptive taxation scheme. Insurance agents earn income by way of commission & hence, they cannot adopt the presumptive taxation scheme of section 44AD
v. A person whose total turnover or gross receipts for the year exceed Rs. 2 crores cannot adopt the presumptive taxation scheme. It can be opted by the eligible persons, if the total turnover or gross receipts from the business do not exceed Rs. 2 crores.
Manner of computation
(i) In case of a eligible person adopting the provisions of section 44AD, income is computed on presumptive basis at the rate of 8% of the turnover or gross receipts of the eligible business for the year.
(ii) In order to promote digital transactions and to encourage small unorganized business to accept digital payments, section 44AD is amended with effect from the assessment year 2017-18 to provide that income shall be computed at the rate of 6% instead of 8% if turnover/gross receipt is received by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed during the previous year or before the due date of filing of return under section 139(1)
(iii) However, a person may voluntarily disclose his business income at more than 8% (in case of cash transitions) or 6% (other than cash), as the case may be, of turnover or gross receipt.
(iv) Presumptive income computed as per the prescribed rate is the final income and no further expenses will be allowed or disallowed. i.e. In case of a person who is opting for the presumptive taxation scheme of section 44AD, the provisions of allowance/disallowances as provided for under the Income-tax Act will not apply and income computed at the presumptive rate of 6% or 8% will be the final taxable income of the business covered under the presumptive taxation scheme. Separate deduction on account of depreciation is also not available.
(v) No need to maintain books of account as prescribed under section 44AA
Payment of Advance tax
In respect of income from business covered under section 44AD:
a. Any person opting for presumptive taxation scheme is liable to pay whole amount of advance tax on or before 15thMarch of the previous year.
b. If he fails to pay the advance tax by 15th March of previous year, he shall be liable to pay interest as per section 234C.Note: Any amount paid by way of advance tax on or before 31st day of March shall also be treated as advance tax paid during the financial year ending on that day.
Provisions applied if a person declares income at a lower rate, i.e., at less than 6% or 8%.
A person can declare income at lower rate (i.e., at less than 6% or 8%), if he does so, & his income exceeds the maximum amount which is not chargeable to tax, then:
- He is required to maintain the books of account as per the provisions of section 44AA and has to get his accounts audited as per section 44AB.
Consequences if a person opts out from the presumptive taxation scheme of section 44AD
1 If a person opts for presumptive taxation scheme, then he is also requiring to follow the same scheme for next 5 years.
2. If he failed to do so, then presumptive taxation scheme will not be available for him for next 5 years. For example – An assessee opts presumptive taxation scheme under Section 44AD for AY 2021-22. However, for AY 2022-23, if he did not opt for presumptive taxation Scheme. In this case, he will not be eligible to claim benefit of presumptive taxation scheme for next five AYs, i.e. from AY 2023-24 to 2027-28.
3. Further, he is required to keep and maintain books of account and he is also liable for tax audit as per section 44AB from the AY in which he opts out from the presumptive taxation scheme. [If his total income exceeds maximum amount not chargeable to tax].
Presumptive Taxation Scheme u/s 44ADA
Eligibility Criteria
This scheme is designed to give relief to small taxpayers engaged in specified profession. Eligible persons who can take advantage of this scheme are –
a. A person resident in India engaged in following professions can take advantage of presumptive taxation scheme of section 44ADA – Legal, Medical, Engineering or Architectural, Accountancy, Technical consultancy & Interior decoration.
b. Benefit of section 44ADA is eligible only in case of assessee who is an Individual & Partnership firm other than LLP.
Manner of computation
In case of a person adopting the presumptive taxation scheme of section 44ADA:
1 In this scheme, income will be computed on presumptive basis, i.e. @ 50% of the total gross receipts of the profession. However, such person can declare income higher than 50%. In other words, in case of a person adopting the provisions of section 44ADA, income will not be computed in normal manner but will be computed @50% of the gross receipts.
2. The presumptive income computed @ 50% is the final income and no further expenses will be allowed. In other words, a person who adopts the presumptive taxation scheme of section 44ADA is deemed to have claimed all deduction of expenses. Any further claim of deduction is not allowed after declaring profit @ 50%. Separate deduction on account of depreciation is not available.
Payment of Advance tax
In respect of income from professions covered under section 44ADA:
1 Any person opting for this scheme is liable to pay whole amount of advance tax on or before 15th March of the previous year.
2. If he fails to pay the advance tax by 15th March of previous year, he shall be liable to pay interest as per section 234C.
3. Note – Any amount paid by way of advance tax on or before 31st day of March shall also be treated as advance tax paid during the financial year ending on that day.
Maintenance of books of account
If a person opts for presumptive taxation scheme of section 44ADA: In case of a person engaged in a specified profession as referred in section 44AA(1) & opts for presumptive taxation scheme of section 44ADA, the provision of section 44AA relating to maintenance of books of account will not apply. In other words, if a person engaged in a specified profession opts for this scheme & declares income @50% of the gross receipts, then he is not required to maintain the books of account in respect of specified profession.
Provisions to be applied if a person does not opt for the presumptive taxation scheme of section 44ADA & declares his income from profession at lower rate (i.e. less than 50%): A person can declare income at lower rate (i.e. less than 50%), however, if he does so, & his income exceeds the maximum amount which is not chargeable to tax, then he is required to maintain the books of account as per the provisions of section 44AA and has to get his accounts audited as per section 44AB.
Presumptive Taxation Scheme under section 44AE
Applicability:
a. This section is applicable to every person (an individual, HUF, firm, company, etc.)
b. This section can be adopted by a person who is engaged in the business of plying, hiring or leasing of goods carriages & who does not own more than 10 goods vehicles at any time during the year
Eligibility
A person who owns more than 10 goods vehicles cannot adopt the presumptive taxation scheme of section 44AE: This Scheme can be adopted by a person who is engaged in the business of plying, hiring or leasing of goods carriages & who does not own more than 10 goods vehicles at any time during the year. The important criterion of the scheme is the restriction on owning of not more than 10 goods vehicles at any time during the year. Thus, if a person owns more than 10 goods vehicles at any time during the year, then he cannot take advantage of this scheme.
Manner of computation
In case of a person adopting the presumptive taxation scheme of section 44AE:
1 In case of a person who is willing to opt for this scheme, income will be computed on an estimated basis.
2. For Heavy Goods Vehicle, income will be computed at the rate of Rs. 1,000 per ton of gross vehicle weight for every month or part of a month during which the heavy goods vehicle is owned by taxpayer.
3. In case of vehicles other than heavy goods vehicle, income will be computed at the rate of 7,500 for every month or part of a month during which the goods carriage is owned by taxpayer. Part of the month would be considered as full month.
Note:
1. If the actual income is higher than the presumptive rate, i.e., higher than Rs. 1,000/Rs. 7,500, then such higher income can be declared.
2. “Heavy Goods Vehicle” means any goods carriage having gross vehicle weight exceeding 12,000 kilograms
Presumptive income computed at the rate of Rs. 1,000 per ton or Rs. 7,500 per goods vehicle per month is the final income & no further expenses will be allowed or disallowed:
i. In case of a person who is opting for the presumptive taxation scheme of section 44AE, the provisions of allowance/disallowances as provided for under the Income-tax Act, will not apply and income computed at the presumptive rate of Rs. 1,000/Rs. 7,500 will be the final income. In other words, the income computed at the rate of Rs. 1,000/Rs. 7,500 per goods vehicle per month will be the final taxable income of the business and no further expenses will be allowed or disallowed.
ii. In case of a taxpayer, being a partnership firm, opting for the presumptive taxation scheme, from the income computed at the presumptive rate of Rs. 7,500 per goods vehicle per month, further deduction can be claimed on account of remuneration and interest paid to partners (computed as per the Income-tax Act)
iii. Separate deduction on account of depreciation is not available
No need to maintain books of account as prescribed under section 44AA – In case of a person opting for this scheme, the provisions of section 44AA relating to maintenance of books of account will not apply. In other words, if a person adopts the provisions of section 44AE & declares his income at the rate of Rs. 7,500 per goods vehicle per month, then he is not required to maintain the books of account as provided for under section 44AA in respect of business covered under this scheme.
Applicability of the provisions relating to payment of advance tax – There is no concession as regards payment of advance tax in case of a person who adopts the presumptive taxation scheme of section 44AE & hence, he will be liable to pay advance tax even if he adopts the presumptive taxation scheme of section 44AE.
Provisions to be applied if a person does not opt for the presumptive taxation scheme of section 44AE & declares income at a lower rate, i.e., at less than Rs. 1,000 per ton or Rs. 7,500 per goods vehicle per month – A person can declare his income at lower rate (i.e., at less than Rs. 1,000 per ton or Rs. 7,500 per goods vehicle per month). However, if he does so, then he is required to maintain the books of account as per the provisions of section 44AA and has to get his accounts audited under section 44AB.
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